Due to the unfortunate recent events in Japan, in the past few days the attention of media and public opinion has shifted from the economic crisis in Europe towards the devastating effects of the earthquake and the following tsunami in Asia. However some European countries are still under huge economic trouble and some of them are on the verge of assuming their difficulties and asking for external help. Still they don’t want to mention the B word as the possible outcome of their crises.
So far countries like Portugal or Spain have been avoiding by all means the possibility of a bailout. For these countries this would mean to assume that they have been in the wrong track and “surrender” to the pressure of other countries in order to ask for external funds to save their economies due to the increasing borrowing costs they are facing nowadays. Both governments have been very careful not to mention a possible bailout and have come out to the media trying to give clear signals that they won’t need any external help, neither from the European Union nor the IMF. The B word that cannot be mentioned in some countries is being implemented anyway but under a different name.
By the end of last week, leaders of 17 European countries gathered up in Brussels to discuss possible measures to undertake in the following months in order to preserve the stability of the region. It is funny though that some of the measures they came up with are quite similar to the ones imposed in regular bailout programs. Let’s see:
1) Europe will increase its lending capacity to the current Rescue Fund for up to 440 billion Euros, just in case they need to bail out one or more countries. (The “just in case” part and the fact that they are speaking in plural when they refer to other countries sounds suspicious)
2) This Rescue Fund will buy bonds directly from the governments and not in an open market basis. (This looks quite similar to a bailout if we think how a bailout program actually works, doesn’t it?)
3) In-troubled economies will have access to these funds only after they accept a series of austerity measures imposed by the EU. (Another similarity…)
Of course they are not saying it is a bailout itself but it reminds us of one.
Although there are many arguments against the intervention of another entity in one country’s economy through a bailout program, it works much better than simply declaring a default of their own sovereign debt. You could just take a look at Argentina and see that they are still trying to work on their creditworthiness since their default in 2001. The conditions to be imposed by the EU are indeed very strict and governments will be obliged to take some economic measures which will be very unpopular for their voters, but that is the price they will have to pay for some bad decision undertaken in the past.
It is clear that the best thing would be not to ask for any kind of external help. However, due to the current situation in Europe, the increasing borrowing costs for these two countries and their local social and economic contexts, I don’t see any other solution in the near future. Let’s hope not. Germany, as the region leader, won’t allow countries to declare default so easily. Like they did with Greece, they will ease the repayment conditions of these obligations in order to help these countries if they need to. Sooner or later European countries will have to stop announcing spending cuts and try other kind of measures in order to boost their economies.
